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Let's take a break from the more esoteric topics, such as high-frequency trading and securities lending, and get back to some basic, though too-often-ignored, research on mutual-fund returns.

The news for investors in actively managed funds isn't good. Released last week by Standard & Poor's, the S&P Indices Versus Active Funds Scorecard shows that 84% of these funds failed to beat their benchmarks. That's the worst showing in the S&P report card's 10-year history. And while that startling fact made some headlines, it might actually be the best piece of news to come out of the report.

Most investors know that one-year returns are virtually meaningless. They're influenced by too many capricious factors and simply don't reflect a manager's skill, or lack thereof. But 57% of active managers trailed the market over the previous three-year period, while 62% did so over five years. These figures were essentially the same across all asset classes, an important point that is routinely ignored, says Srikant Dash, managing director of S&P Indexes and one of the report's authors. "It's a common belief in the investment community that active management is more effective in small- and mid-cap companies," he says. "But the data over the last 10 years has consistently shown that not to be the case. The degree of outperformance by an index doesn't really change by asset class."

There's more. The S&P Persistence Scorecard is a companion piece that evaluates the consistency of the best-performing managers. For instance, it tracks the ability of the top quartile of managers in one five-year period to land again in the top quartile in the next five years. Very few do. Only 12.2% of the large-cap funds, 3% of mid-cap funds and 20.2% of small-cap funds that were ranked in the top 25% in the five years ended in September 2006 maintained a spot in the top quartile in the five years through September 2011.

Random expectations would suggest a repeat rate of 25%.

"There's no evidence of persistence of performance beyond what would be randomly expected," says Larry Swedroe, principal and director of research for Buckingham Asset Management. "Now, this doesn't tell you that there's no skill in any manager's stock-picking ability. But how do you find those managers? And even if you find them, that outperformance can't last indefinitely."

SWEDROE POINTS TO SOME OF THE most famous investing heroes—and their equally infamous falls from grace. "Bill Miller was Morningstar's manager of the decade in the '90s," Swedroe says of the former Legg Mason star. "After they cursed him, they named Fairholme's Bruce Berkowitz manager of the decade." Both had famously market-beating hot streaks for more than a decade—until both had abrupt and ignominious falls from grace.

To his credit, Miller often called his winning streak a trick of the calendar. Right now, the calendar is playing a nice trick on many funds' three-year returns. As of March 9, the 57% plunge the S&P 500 took during the financial crisis has officially rolled off the three-year numbers. Since then, the S&P has more than doubled, leading to a stark difference between the three-year returns funds show today as compared to a month or two ago.

"It certainly points out the shortcomings of looking at trailing performance, especially of shorter terms," says Dan Culloton, Morningstar's associate director of fund analysis. On average, domestic equity funds returned 15.8% annually in the three years through Dec. 31, 2011. Not bad. But as of March 16, their average annual return over three years had jumped to 27%.

Fairholme Fund's
(FAIRX) three-year annualized return of 5.6% put it in the bottom 1% of all funds at the end of 2011. As of March 16, Berkowitz's fund had leapt up to the 56th percentile, with a three-year return of 22.9%.

Miller is about to exit as manager of
Legg Mason Value Trust
(LMVTX), the fund that had a 15-year market-beating streak, ending in 2005. He'll focus on
Legg Mason Capital Opportunity
(LMOPX), an even more problematic fund. Here again the calendar works in his favor, as a particularly ugly quarter rolls off its three-year report card. The fund's average annual 11.6% return left it languishing in the bottom 5% of all funds over the three years ended in December 2011. Now it has shot up to the slightly-better-than-average 48th percentile, with an average annual return of 28.7% over three years.